The present invention relates to calculations of securities positions and, more particularly relates to means for automatically calculating net capital deductions, or "haircuts," for security positions held by a brokerage firm (referred to herein interchangeably with "broker-dealer firm") to ensure government compliance.
The present invention provides means for automatically ensuring compliance with the broker-dealer reporting requirements under Rule 15-c 3-1 of the Security and Exchange Commission, sometimes referred to as the "net capital rule". The net capital rule is a uniform and comprehensive capital adequacy standard for the brokerage industry, including municipal securities dealers (hereinafter referred to interchangeably as "broker-dealer"). The Net Capital Rule was drafted to ensure that broker-dealers maintain sufficient (as qualified by the SEC) aggregate levels of capital and liquid assets for the protection of their customers, investors, creditors and the industry, in the event of a financial crisis, e.g., bankruptcy or insolvency.
Compliance with the net capital rule requires that a broker-dealer valuate its security holdings, that is, adjust a security's marked-to-market value in the broker-dealer's holdings. That is, the paper value of certain securities as representative of the broker-dealer's cash assets is shaved or "haircut", if necessary, in order to properly calculate the broker-dealer's net capital in order that same broker-dealer can show compliance with Rule 15-c 3-1. There are two methods for determining the minimum net capital required to be held by a broker-dealer.
The first method, "the aggregate indebtedness standard" requires the greater of $250,000 ($150,000 for municipal bond dealers) or two percent (2%) of aggregate debit items computed under the customer or client protection rules. The aggregate indebtedness standard requires broker-dealers to maintain a maximum ratio of indebtedness to liquid capital of fifteen (15) to one (1). Indebtedness has been interpreted as including all money owed to the broker-dealer, including margin loans and commitments to purchase securities. Liquid capital is interpreted as including cash and assets easily converted into cash. Broker-dealers that have large aggregate indebtedness are allowed to compute their net capital requirements using the second method, known as the "alternative net capital standard."
"Haircut" is an industry term for a calculated coefficient (a decimal value less than one) which is used to adjust or scale down the security's reportable liquid capital value. The "haircut" value (i.e., liquid capital) may then be utilized to calculate the broker-dealer's net capital requirements and if it in compliance therewith. For that matter, compliance with Rule 15-c 3-1 (the Net Capital Rule) typically requires daily computation of haircut amounts, if any, to the securities held by the broker-dealer to calculate the net market value for each security and therefore, the broker-dealer's position daily. The haircut or calculation for each security held is based on riskiness and liquidity of each category of security held by the broker-dealer. The broker-dealer must always operate in consequence of the calculated net market value of the securities it holds, that is, it must keep a minimum net capital depending on the aggregate value of its securities.
Net capital deductions (that is, haircuts) reduce the broker-dealer's net capital value, a great concern for the SEC. Hence, a device or apparatus capable of automatically calculating a "haircut" for each security held and calculating the adjustment to the broker-dealer's net capital in order to comply with the Net Capital Rule. The automatic calculation may be carried out real time if the apparatus is electronically connected to a source of real-time stock market or securities information.
For that matter, various apparatus and methods are known for encoding stock market data and transmitting same for private or public access. One example is embodied in U.S. Pat. No. 5,045,848 to Fascenda, which discloses a method of encoding and transmitting market data in a cyclical repetitive loop, with real-time data inserted in the loop data during business hours of the New York Stock markets. And U.S. Pat. No. 4,815,030 to Cross et al. discloses a multitask, multi-user system to enable efficient transfer of data from a remote data base (a stock market data base) to individual subscribers for distribution of same stock market data. For that matter most broker-dealers today have stock market data available to them electronically in real-time.